Here’s why investors are still necessary for the real estate sector


While the current market slowdown would suggest that investors have ‘deserted the real estate sector’, the fact remains that developers have come to rely on their funding and will continue to do so. Housing News analyses why

Although not many developers may be willing to publicly admit it, the fact is that developers find it advantageous to have investors as anchors for their projects. Developers need money, even before they can commence a project, to buy land and often, only the investors will give them money at that early stage, without any collateral or receivable.

“Approvals can take any amount of time but not less than one year. During that phase, nobody is going to stand by you, except the investor,” says a candid Sunny Bijlani, director of Supreme Universal, on the advantages of having investors to anchor a project.

“Even banks will not fund you. All the organised funding starts, only when you have something ready to offer to them. However, developers cannot keep waiting till a project gets approved, to launch it; you need some quasi-investment at each stage,” he explains.

In this scenario, there are two models in real estate investment. The first, involves a pre-launch with funding only from investors and a minimum amount of understanding as to what kind of a project it would shape up to be, in the future. The second kind of pre-launch is crowdfunding, where there is better clarity on the project’s details. In this case, the developer has the plans for the project (including layouts, floor plans and unit plans) ready but does not have sanctions. Consequently, this is a mass pre-launch and does not depend only on a select set of investors. Although laws do not allow such opaque transactions, it is an open secret in the Indian property market and akin to an IPO model. The advantage for developers, is that the price point here, is higher than the price point at which they offer it to the select set of investors.

See also: Are investors a market necessity?

According to Devang Trivedi, managing director of the Progressive Group, unlike end-users, investors are not problematic as they do not ask too many questions. Even if there are some escalation charges, it is easy to deal with one investor than 15 or 20 other people who will keep fighting. So, an investor is an easier person to deal with, once he comes in, he justifies.

“Developers have to brave various odds – courts, ministries, municipalities, local factors, environment and market forces. Under these circumstances, an investor is an asset for the developer. Even when an investor exits, in many cases, he does not sell it to the end-users but sells it back to the developer, who buys it at a thousand-odd rupees cheaper than the price at which the developer will sell to the end-user,” points out Trivedi.

(The writer is CEO, Track2Realty)

 

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